Defining a Balanced Budget
On a cash basis, the question of a balanced budget can be examined using three views. Ideally, the answer should be affirmative regardless of the view.
The first view involves a comparison of receipts and expenditures over the course of a twelve-month fiscal year. If receipts exceed expenditures, there is an operational surplus and the end-of-year available balance increases. If not, there is an operational deficit that can only be financed by drawing down the end-of-year balance.
The second and third views are based on the budgetary balance concept. View two compares the end-of-year balance to lapse period spending. Although state agency budgets are enacted on the basis of a 12-month fiscal year, agencies are permitted to spend their appropriations over a 14-month period (formerly 15 months). The additional two months (July and August) are collectively referred to as the lapse period. During this period agencies are allowed to use last year’s spending authority (appropriations) to pay for bills incurred during the prior year.
If the end-of-year balance is high enough to cover lapse period spending, the budget is technically said to be balanced. If the opposite occurs, the budget is out of balance. When this happens, it effectively means that next year’s money is used to pay last year’s bills. This comparison produces a number that is commonly referred to as the budgetary balance.
The third view compares changes in the budgetary balance. If the budgetary balance improves, the budget is balanced. This holds even when the budgetary balance goes from a large negative to a smaller negative. In that case there is a cash improvement.
Of these three views, the first is of limited use in judging the overall fiscal health of the state because it can be impacted by any number of timing factors. Although the third view shows whether the fiscal situation is moving in the right direction, it too is of limited value because it does not indicate whether the budget is actually balanced.
The second measure, called the budgetary balance, is the most comprehensive because it views a budget as balanced in any given year when the available resources meet or exceed the uses of those resources.